Inergy Midstream IPO Disappoints

| About: Crestwood Midstream (CMLP)

Inergy Midstream, L.P.(NRGM), begins trading Friday after pricing an initial public offering Thursday night. The partnership, formed by Inergy, L.P.(NRGY), sold 16 million units at $17 per unit, with an overallotment option for another 2.4 million units. That price was below the previously indicated range of $19 to $21. All proceeds raised will go to Inergy, L.P. After the offering, Inergy, L.P. will still own about 78.5% of the limited partner interest in Inergy Midstream, or about 75.2% if the overallotment is fully exercised.

As an owner of the common units in Inergy, L.P., I can't say I'm thrilled about this deal. The offering priced $2 below the low end of the range, meaning the offering will raise about 10% less than anticipated. As the fastest growing segment at Inergy, Inergy Midstream is, in my opinion, the only reason to own NRGY. Inergy Midstream is growing quickly, having assets in prime locations to serve both the Marcellus Shale and the Texas markets.

With the propane business underperforming for the past several quarters, Inergy Midstream has performed well, and the growth is showing no signs of slowing. The only possible reason I can see for the offering not pricing well would be the poor performance of Niska Gas Storage (NYSE:NKA) and PAA Natural Gas Storage (NYSE:PNG) since their IPOs, and that performance is something Inergy should have considered before selling almost a quarter of its best asset at a reduced price.

After this IPO, Inergy will be able to reduce its debt load, which is a positive. However, longer term, I still question this strategy. Inergy will not have assets that can further be dropped down to NRGM, and therefore I question why Inergy would not rather own 100% of NRGM. Inergy is bouncing off its 52-week low, and I feel like this move is more based on giving management something to point to as trying to create value.

Personally, I'd rather see distribution increases than new IPOs. I continue to believe that the best thing for the unit price would be that management spin out the rest of NRGM to NRGY shareholders than put the remaining business up for sale. Until the distribution level for NRGY begins to move higher, expect the unit prices to remain depressed.

Disclosure: I am long NRGY.